New York Markets After Hours

Mortgage-REIT sell-off overplays liquidity risks: analysts

JohnSpence

BOSTON (MarketWatch) -- The sharp sell-off in mortgage real-estate investment trusts this week triggered by a spate of margin calls was overblown, analysts said as the Federal Reserve moved Friday to inject more liquidity into the global banking sector.

"The average 25% sell-off in the agency residential mortgage-backed security REITs seen [on Thursday] far overstates the funding risk that we see in these companies' balance sheets," Steven DeLaney of JMP Securities wrote in a note Friday.

Although funding costs and margin calls could increase due to widening credit spreads, the sector has enough liquidity to provide a cushion, he added.

Shares of one of the industry's biggest names, Thornburg Mortgage Inc.
TMA, +0.14%
fell more than 50% Thursday as the troubled company faced more margin calls and analyst downgrades this week. The lender said that it defaulted on multiple financing agreements. The stock was at $1.27 Friday afternoon, down more than 23% for the session.

What's more, the yield spread between fixed, 30-year mortgages and the 10-year Treasury exploded this week as the deleveraging of the financial system picked up steam and entered new markets. See related story.

Carlyle Capital Corp. (86522)
CARYF
an affiliate of private-equity giant Carlyle Group that invests in mortgage-backed securities, said Thursday that it failed to meet margin calls from four counterparties and had received one notice of default.

The iShares Mortgage REIT ETF
REM, +0.00%
was down slightly at last check Friday afternoon. Heading into the session, the exchange-traded fund was off 20% for the past month as the mortgage crisis accelerated.

"The supply overhang of mortgage-backed securities of all varieties has sent buyers to the sidelines, causing prices to plummet when price discovery became essential for seller or dealer," said JMP's DeLaney.

Still, the analyst counseled patience as "the cavalry may be coming."

Indeed, the Fed on Friday unveiled measures designed to help bolster foundering credit markets.

One step taken by the central bank will allow banks and other financial institutions to hand over securities burdened with lower liquidity in return for highly liquid securities. The Fed is trying to prop up liquidity in the market for agency-backed mortgages. See full story.

'Illogical conclusions'

Fox-Pitt, Kelton analyst Matthew Howlett recommended buying mortgage REITs on the weakness. He stuck with his ratings and estimates on Annaly, Anworth, Capstead and MFA.

The stock sell-off is "overdone and based on illogical conclusions being reached about the business model, in conjunction with the well-publicized meltdown in the nonagency space and funding issues with at least one private-agency REIT," Howlett wrote in a note.

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